A guide for sellers and buyers

I have nothing against real estate agents.  Listing agents help sellers with pricing, inspections, marketing, and contracts.  Buyers' agents chauffeur their clients to different houses, tell them about different neighborhoods, and help them negotiate offers.  

The problem is they charge too much.  With home prices so high, their services are no longer worth the 5% to 6% commissions they receive.  

Real estate agents protest that their commissions are fair--most of them work very hard and earn just modest incomes.  True enough, but that's only because there are too many real estate agents.  

Here's why:  Imagine a world in which, say, roofers formed an association that fixed the price of roofing to 6% of any home's value.  At first, roofers would do quite well--they could make $720,000 a year if they roofed just two $500,000 houses a month.  

But the windfall wouldn't last.  Other people would rush to share in the bonanza.  Before long, roofers would be spending most of their time competing for customers.  

Of course, if we had to pay 6% of our home's value to get it roofed, many of us would strap on tool belts and do the work ourselves.  As we worked, professional roofers would surely stop by to warn us of the dangers.  We could fall and get injured.  There could be expensive water damage if we did it wrong.  But many of us would persevere.  We are, after all, a nation of do-it-yourselfers.

If we had to pay 6% of our property's value to get it roofed, many of us would do it ourselves.

Something similar has happened with real estate agents.  Because of high commissions, some two million Americans have gotten licenses.  But there's not enough work to go around.  The average working realtor sells just six houses a year, but works year-round to get clients.  As economists Dubner and Levitt (authors of Freakonomics) put it, "Most real-estate agents seem to spend 95 percent of their energy chasing clients (for which they are paid nothing) and 5 percent actually serving them (for which they are paid way too much)."

In this primer, I'll explain how sellers can get much more "bang for the buck" by overseeing the sale of their houses themselves and hiring just the service providers -- like MLS brokers and photographers -- they want.  For more information, go to Advice for Sellers.

I'll also explain how buyers can save money either by making offers without the help of a real estate agent, or by doing some of the work themselves and asking agents for buyer rebates.  For more information, go to Advice for Buyers.


Disclaimer:  This information in this website is offered free of charge as a public service.  I make no representations or warranties about its accuracy or completeness.  My advice may not apply to your situation or in your state.  I shall not be liable for any damages resulting from the use of this content.   

ŠLori Alden, 2008.  All rights reserved.